Wood Creations designs, manufactures, and sells modern wood sculptures. Sally Jensen is an artist for the company. Jensen has spent much of the past month working on the design of an intricate abstract piece. Jim Smoot, product development manager, likes the design. However, he wants to make sure that the sculpture can be priced competitively. Alexis Nampa, Wood’s cost accountant, presents Smoot with the following cost data for the expected production of 75 sculptures:

Design cost .............$ 8,000

Direct materials ............ 32,000

Direct manufacturing labor ....... 38,000

Variable manufacturing overhead ...... 32,000

Fixed manufacturing overhead ....... 26,000

Marketing ............... 14,000

Required

1. Smoot thinks that Wood Creations can successfully market each piece for $ 2,500. The company’s target operating income is 25% of revenue. Calculate the target full cost of producing the 75 sculptures. Does the cost estimate Nampa developed meet Wood’s requirements? Is value engineering needed?

2. Smoot discovers that Jensen has designed the sculpture using the highest-grade wood available, rather than the standard grade of wood that Wood Creations normally uses. Replacing the grade of wood will lower the cost of direct materials by 60%. However, the redesign will require an additional $ 1,100 of design cost, and the sculptures will be sold for $ 2,400 each. Will this design change allow the sculpture to meet its target cost? Is the cost of wood a locked-in cost?

3. Jensen insists that the higher-grade wood is a necessity in terms of the sculpture’s design. She believes that spending an additional $ 3,000 on better marketing will allow Wood Creations to sell each sculpture for $ 2,700. If this is the case, will the sculptures’ target cost be achieved without any value engineering?

4. Compare the total operating income on the 75 sculptures for requirements 2 and 3. What do you recommend Wood Creations do, based solely on your calculations? Explain briefly.

5. What challenges might managers at Wood Creations encounter in achieving the target cost and how might they overcome these challenges?